What You Need to Know
The American Rescue Plan Act changed the IRS reporting threshold for income via payment apps to $600 from $20,000, starting in tax year 2022.
The IRS recently announced it would delay the change for a year, to tax year 2023.
Taxpayers who earn income via payment apps need to report it, whether they get a 1099-K or not.
Many of us use peer-to-peer digital apps such as Venmo, Zelle, PayPal and others to pay friends and family for things such as our share of dinner. These payment apps also are used frequently for business payments, and your clients might need to know about changes to rules affecting Venmo and PayPal tax reporting.
When and How Are the Payment App Tax Reporting Rules Changing?
The American Rescue Plan Act of 2021 required payment apps to report transactions for goods and services in excess of $600 to the IRS starting in the 2022 tax year. Under previous rules, the IRS reporting threshold was $20,000 and 200 or more transactions.
The change caused consternation among tax preparers. In mid-December, the American Institute of CPAs sent a letter to Congress urging lawmakers to raise the $600 threshold, saying the new requirements would confuse taxpayers and strain the IRS.
On Dec. 23, the IRS announced that it would delay the reporting change until tax year 2023 “to help smooth the transition and ensure clarity for taxpayers, tax professionals and industry.”
When Do I Need to Report This?
Whether your client has received a Form 1099-K or not, any income received via Venmo or other payment apps must be reported as income on their tax return, which is due in April. Whether these payments are in connection with their primary occupation or a side hustle, they are considered to be income and must be reported to the IRS as such.
Is There a Penalty for Not Reporting?
The penalty for not reporting all business income received via a payment app is the same as underreporting other business income received by check, credit card or any other payment method. Payment apps are just another way of receiving payments from customers and clients. All Venmo taxes and PayPal taxes must be paid as part of your client’s business taxes.
What Payments Need to Be Reported?
Any payments received in the course of your client’s business activities. Whether they receive payments from Venmo, PayPal and other apps or by any other means, payments that constitute business income must be accounted for and reported correctly. Failure to do so can result in penalties or worse from the IRS.
What Payments Don’t Need to Be Reported?
Payments of a personal nature do not have to be reported as income. Examples include payments received by friends or family as reimbursement for their share of a meal. Payments received as a birthday or holiday gift would also be exempt.
This can get “gray” pretty easily. For example, if you sold a used piece of furniture or similar item and received payment via a payment app, the payment could be income if you sold the item for more than what it cost you. It would not be income if it was sold at a loss, however.